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Clifford Chance

Clifford Chance

Antitrust/FDI Insights

Japan Fair Trade Commission issued a report on potential antitrust issues relating to IPOs in Japan

The JFTC indicates that it may be anti-competitive if a lead manager suggests issuers a very low offering price without enough explanation to the issuers.

The Japan Fair Trade Commission (JFTC) published a report on potential antitrust law issues on pricing of initial public offerings (IPOs) on 28 January 2022.

Background

The Japanese government pointed out in June 2021, that there have been some cases where the price at which the issuers initially sell their shares to the public (offering price) in the IPOs is much lower than the prices that were initially quoted in the market following the IPOs.

The JFTC conducted a survey on this issue, by sending questionnaires to, and having interviews with, companies that were recently listed, managers handling IPOs, and the Tokyo Stock Exchange.

Potential Antitrust Issues

Although the JFTC did not find actual breaches of the Japanese Anti-Monopoly Act through the survey, they identified the following three antitrust issues relating to IPOs.

Low offering price without enough explanation: A lead manager may have a superior bargaining position against an issuer (e.g., the issuer practically does not have an option to change the lead manager or appoint a co-lead manager). In such case, it might be a breach of the Japanese Anti-Monopoly Act, if the lead manager unilaterally suggests an offering price and issuers are persuaded to accept the suggested prices without enough explanation or reasonable background. This could result in receiving lower proceeds from the IPOs than those that issuers could receive if there had been competitive pricing, while the lead managers could easily sell out all the underwritten shares without the risk of remaining shares. The JFTC recommended lead managers to (i) have thorough discussions with issuers and suggest offering prices after the issuers are fully agreed, (ii) allow issuers to change the lead manager or appoint a co-lead manager, (iii) not prevent issuers from obtaining a second opinion from third parties regarding offering price, and (iv) not require issuers to give a very high subscription share to the lead managers.

Interference with competing lead managers' appointment: If lead managers unjustly try to prevent issuers from changing lead manager or having co-lead managers, it might be a breach of the Japanese Anti-Monopoly Act.

Information exchange of underwriting fees: If managers exchange the information regarding their underwriting fees among them, it might be a breach of the Japanese Anti-Monopoly Act.

Impact on Your Business

On 28 February 2022, which is one month after the publication of the JFTC's report, the Japan Securities Dealers Association (JSDA) issued a report of its working group regarding procedures of pricing in IPOs. Such working group report's recommendations are in line with the JFTC's report. According to the recommendations, the managers should explain to issuers the reason for and background of the suggestion of offering prices and should not prevent the addition or change of the lead manager. Managers must ensure to follow the recommendations indicated in the JFTC's report and the JSDA's working group report.

Also, issuers are recommended to request their lead managers to provide a detailed explanation of offering prices and to consider if a second opinion from a third party is necessary or not.